Europe to 'Fitness Check' Weak Refining Sector

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland) -The weakened European oil refining sector is to undergo a 'fitness check' by the European Commission (E.C.) to gauge the impact of its regulations on the industry.

The E.C.'s Joint Research Centre will carry out the assessment, known as the Refining Fitness Check , examining current regulations to see if there is any overlap that is placing 'unintended burdens' on oil refiners. The Commission said that the fitness check 'should ultimately focus on how coherently and consistently the relevant EU legislation works together, whether it is effective and efficient, and to look for excessive regulatory burdens, overlaps, gaps, inconsistencies and obsolete measures'. However, the 'check' will take until next September to complete, which the industry complained is too long and does nothing to protect them from current and pending legislation.

Current European Union (E.U.) environmental and energy legislation is highlighted as a key reason by the refining industry for why E.U. refining continues to decline. The cost of complying with existing and proposed legislation is costing refiners billions of euro at a time when the European refining sector has never been weaker. Industry figures released at the first meeting of the E.U. Refining Forum in April, which was attended by industry representatives from 18 countries, said that $30 billion in investments in refining are planned in Europe by 2020 but an extra $21 billion is necessary - equivalent to $1/barrel on the refining margin - just to stay in business.

The Fuel Quality Directive (FQD) is particularly contentious, as it sets out to label different fuels on the basis of how carbon-intensive they are. The revised Directive sets binding targets for the reduction of lifecycle Greenhouse Gas (GHG) emissions of fuels, placing the responsibility of compliance on fuel suppliers. The E.U. wants to force oil companies to account for the increased greenhouse gas emissions from the energy intensive process of strip mining and the steam injections needed to produce tar sands, for instance. Canada and the oil industry have been behind fierce lobbying against the move.

Figures from the U.K. Petroleum Industry Association (UKPIA) estimate that between 2013 and 2030, the U.K. industry will have to spend €13.6 billion ($18.7 billion) to comply with a variety of European regulations. Just under half of that will be spent on new emission abatement equipment, new processing capacity, crude and product storage and containment improvements. The remainder will be needed to cover additional operational costs, including the cost of operating the new abatement equipment and also for payments for additional European Union Allowances (EUAs) and supporting the U.K.'s target carbon floor price.

Right now, global crude oil refining capacity in 2013 fell from a high in 2012, with Western Europe showing the biggest drop of more than 3%, according to the latest OGJ Refinery Survey . The region - with more than 13.5 million barrels per calendar day (bc/d) - ranks third in total capacity behind Asia and North America. According to data from BP plc (NYSE:BP) (London, England) OECD oil consumption declined by 1.3% (530,000 b/d), the sixth decrease in the past seven years. The OECD now accounts for just 50.2% of global consumption, the smallest share on record.

Europe has suffered more than any other region in the world in terms of reductions in refining margins. Overcapacity and weakening demand caused by the prolonged economic recession has damaged profitability for many refiners. There is also increased competition from newer refineries in India, China and the Middle East, where supply outstrips demand and the excess is exported to Europe and other world markets.

Commercial pressure has forced many refineries out of business. Since 2008, 15 European refineries have shut down, removing 8% of the region's fuel-processing capacity. Others are running at reduced capacity while some are up for sale. BP stated that the countries which have lost the greatest amount of refining capacity between 2008-2012 are France (25%), Germany (12%), U.K.. (11%) and Italy (8%).

In October, Scotland's only oil refinery was shut down temporarily by owner INEOS (Switzerland) over a threat of strike action. The Grangemouth refinery and petrochemical plant employs 1,370 people and provides most of the fuel to Scotland, the north of England and Northern Ireland. After agreements with unions, the refinery will now remain open for 3 years. For additional information, see October 25, 2013, article - INEOS Shuts Scotland's Grangemouth Refinery and Petrochemical Plant.

In 2012, the 220,000-bc/d Coryton refinery near London was shut down suddenly after owner, Petroplus Holdings AG (VTX:PPHN) (Zug, Switzerland), went bankrupt. Unlike many older plants, Coryton was considered to be one of the most modern refineries in Europe, supplying around 10% of the U.K.'s fuel.

Italy's refining sector is also facing a crisis. In October, Hungary's MOL Group (Budapest, Hungary) announced that it would close the small 52,000-bc/d Mantova refinery in northern Italy on New Year's Eve. It blamed unfavourable economic conditions and falling demand. MOL said that Italian demand for refined fuels has fallen to 80 million tons in 2012, down significantly from 116 million tons in 2000. Last year the 86,000-bc/d Total ERG Rome Refinery ceased activities to become a storage terminal while the 85,000-bc/d Api Ancona refinery was shut down for six months due to poor margins early in 2013.

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